Budget merger either a boon for Railways or disaster for Jaitley

The corridors of Rail Bhavan had turned anxious weeks before the Union Cabinet’s nod to burial of the 92-year-old Railway Budget. The sense of uncertainty was palpable in the finance ministry as well, at Raisina Hill, barely half a kilometre away from Rail Bhavan.

The disquiet in both places points to the fact that the merger of the railway budget with the Union Budget is going to be a lot more than just the end of a British legacy.

Railway minister Suresh Prabhu often gets twitchy when asked about the purpose and deliverables of the merger. However, everyone associated with the Indian Railways knows the merger will eventually lead to the long awaited restructuring of the railways in order to minimise the threat to finance minister Arun Jaitley’s fiscal wagon.

The country’s messy public transport behemoth has finally been forced to sacrifice its budgetary freedom to avoid a financial disaster. Despite all efforts, Prabhu could not improve the finances of the railways.

In the last one month, he has squeezed the railways' two most profitable services. First, the freight on coal was increased, because almost 50 per cent of the freight revenue comes from coal. After that, surge pricing (hiking fares according to demand) in premium trains was implemented.

Caught in a serious financial mess, the railways has been forced to blunt its competitive edge over air travel. As a last resort, Prabhu has tried to ease Jaitley’s burden by increasing fares and freight, but in vain. Now the burden lies with Jaitley, who will have to balance the railways' finances with social responsibilities.

The relationship between the railways and the finance ministry is complicated. The railways is not a company, yet it pays dividend to the government - interest on loans received from the budget.

It gets funds from the General Budget to modernise its network because it is often left with no resources to do the same after meeting daily expenses, paying salaries, pensions and interest on loans from its revenues.

Also, there are PSUs under the railways which separately receive finances from the government treasury. The railways also borrows through the Railway Finance Corporation for lease payments on wagons and coaches.

Its operations run in huge losses. This loss is associated with subsidy on passenger fares (Rs 34,000 crore) and those projects that have to deal with strategic and social needs. Besides this, the railways needs Rs 4.83 lakh crore for pending projects and Rs 30,000 crore for implementation of Pay Commission recommendations.

With merger of the Rail Budget with General Budget, all losses, dues, and loans will ideally become the responsibility of Jaitley. The rail minister will be liberated from dividend payments and political pressure of managing the railways.

The railways will more or less get the status of the postal department whose losses and expenditure will belong to the Union Budget.

However, unlike the postal department, liabilities of the largest transporter of India, its dues and financial difficulties are gargantuan. The losses, dues, pensions and salaries will encumber the Union Budget enormously, and the fiscal deficit may also shoot through the roof. Thus, the merger of budgets will make railways' restructuring inevitable.

This restructuring may have four dimensions:

1) Through accounting reforms, the railways' social responsibilities might be separated from commercial interests and for select social services and projects, subsidy may have to be fixed in the Budget. The railways may have to wipe out losses by increasing freight and fares. Setting up an independent regulator may also be part of this.

2) Railway hospitals and schools should be shut or sold to reduce expenditure.

3) On the basis of Bibek Debroy committee's recommendations, functions of railways' transportation and infrastructure should be turned into companies and a holding company should be formed for its public utilities.

4) Private investment should be invited for railways' new companies, or they should be listed on the stock market through disinvestment.

With the merger of budgets, the railways is seen to be going back to its history. Before 1880, half a dozen companies ran the railways network in India. The British government merged them to establish a gigantic government transporter.

Following the reorganisation, the railway budget came into being in 1921 on the recommendation of the Acworth committee.

Now, post merger of budgets, the railways will have to return to a company structure, to make itself commercially and socially sustainable. It already has separate companies for coaches, wheels, engines manufacturing and services like reservation.

Its largest operations, that is, transportation and infrastructure, have to be corporatised in order to give it an efficient modern structure. 

One hopes Jaitley has not planted a ticking time bomb under his seat by burying the railways' mess under General Budget numbers. The political leadership will have to swallow the bitter pill of overhauling the behemoth. Without that, the merger would become a nightmare for the finance ministry.

Also read: Why getting rid of rail budget is Suresh Prabhu's best move